Center for Social and Economic Research Marek Dabrowski Participation in the EU Internal Market: the experience of NMS and its relevance to the ENP Presentation prepared for the 10th Euro-Med Economic Transition Conference on Giving the Neighbors a stake in the EU Internal Market, Brussels, June 6-7, 2006
Merchandise Trade of Eastern Europe, by direction Source: UNECE Economic Survey of Europe, 2005 No. 2, Appendix Table B14
Czech Hungary Poland Estonia Slovenia Slovakia Latvia Lithuania Romania Bulgaria Croatia Macedonia Albania Bosnia and Herz. EU integration process (embracing Balkans) 1990 1995 2000 2005 Serbia and Mont. Associate Applicant Negotiating Member
NMS unfinished integration with the EU Internal Market Transition arrangements related to free movement of labor Transition arrangements related to some services Transition arrangements related to land purchase Indirectly: EMU and Schengen
Directions of Exports of Goods, 2004, World=100% Source: European Economy 2005, No. 5, Table 57
Sources of integration success of NMS Clear perspective of EU membership Strong incentives to conduct reforms and open the economy Guidelines how to reform (acquis) mass-scale institutional import Package solutions (loses in one area could be compensated in another area) Generous EU offer at the association stage Asymmetric trade liberalization TAA before or parallelly to WTO accession Early abolishing of visa regime Substantial aid package
The magnetism of EU membership Political ( club ) membership Historical links and cultural proximity Geopolitics and security Four basic freedoms (goods, services, capital, labor) Prospects of prosperity Structural funds = the magnetism of a Western European prosperity, freedom and lifestyle
Limited relevance of NMS experience The ENP offer does not include the EU membership perspective The ENP is unlikely to provide a fast-track full participation of neighbors in the EU internal market (particularly for CIS); more realistic option: selective participation in some segments of EU internal market selective institutional harmonization with acquis Integration fatigue in Western Europe Institutional problems in neighborhood countries are different comparing to those of NMS in 1990s and early 2000s (particularly in the case of Southern neighbors)
Possibly more similarities to the current and future EU accession process of Turkey and Western Balkans
Consequences of differences Weaker incentives to domestic reforms and integration Weaker enforcement mechanism Lack of package effect sectoral negotiations driven by narrow sectoral interests on both sides Bilateral agendas of ENP Action Plans Domestically: weaker reinforcement effect (integration progress helps to build a prointegration constituency)
Limited market integration with neighbors Southern neighbors: association agreements with long implementation period (up to 12 years); asymmetric liberalization for manufactured goods; important sectors (like agriculture or services) only partly covered or excluded CIS: only PCAs so far; postponing start of trade liberalization negotiations after WTO accession process will be completed (difference with NMS and Balkans) Restriction on movement of people (visa regimes) Various degree of liberalization of capital movement in neighboring countries but limited real flows due to poor investment climate
Integration obstacles (neighbors side) Failure to meet Copenhagen criteria Deficit of democracy, human rights and rule of law Poor business climate, excessive protectionism, government interventionism and etatism Weak institutions Limited interest in advanced forms of European integration (due to historical and cultural differences) with some exceptions like Moldova and Ukraine
Integration obstacles (EU side) Integration fatigue Cultural differences/ prejudices Income differences Migration/ security fears Unreformed CAP, welfare state and other structural rigidities Limited economic potential of neighbors
Arguments in favor of closer integration of neighbors with the EU Geopolitics and regional security Window of opportunity for economic, social and political modernization of neighbors Energy supply and transit Transport routes Controlling migration flows Economic, cultural and historical interests of frontier EU member states
Arguments in favor of package approach: 1.Trade expansion will depend not only on trade liberalization per se but also on neighbors investment climate, speed of institutional harmonization and, to some extent, on liberalization of movement of people. 2.Intensification of foreign investment inflow to neighbors will depend not only on improvement of domestic investment climates (determined by a speed of institutional harmonization) but also on trade liberalization (market access).
Arguments in favor of package approach (cont.): 3. Intensification of trade and FDI and the resulting diminishing of the income gap can weaken the income motive of labor migration and make freer movement of people less politically controversial in the EU. To some extent, free movement of goods and capital may serve as a substitute to the free movement of labor. 4. Free movement of people is important for balancing national labor markets, current accounts, development of the domestic SME sector and learning experience of more mature market economies and democratic societies, therefore strengthening pro-reform constituencies in origin countries.
Arguments in favor of package approach (cont.): 5. Institutional harmonization involves substantial costs. The traditional pay-off offered by the EU (modest improvement of trade access and technical assistance) is insufficient. A stronger set of incentives should include a faster pace of trade liberalization and liberalization of movement of people. For countries, which are interested in EU membership, such a perspective should not be ruled out a priori.